Fundamentals of Advanced Accounting

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7e Stays Current as the Accounting
Profession Changes
∙ Added a new research and analysis case on Micro-
soft’s 2015 goodwill impairment loss.
Chapter 4
∙ Updated real-world references.
∙ Added two new equity method end-of-chapter problems.
∙ Added new end-of-chapter cases using the financial
reports of Starbucks (step-acquisition example) and
Costco (various noncontrolling interest figures and
interpretations).
∙ Revised the end-of-chapter comprehensive FASB ASC
and IFRS research case. The new case, entitled Bardeen
Electric, continues to focus on valuation issues accom-
panying a business combination including alternative
goodwill measurement under IFRS. In addition, several
other end-of-chapter problems have been revised.
Chapter 5
∙ Updated terminology in discussion of intra-entity
gross profits to reflect the new revenue recognition
standards (ASC 606).
∙ Revised and expanded coverage of the deferral and
subsequent recognition of intra-entity gains on long-
term assets transfers across affiliates. The revised expo-
sition emphasizes the nature of reallocating intra-entity
gains across time increasing consistency with the chap-
ter’s coverage of intra-entity gross profits in inventory.
∙ Updated real-world references.
∙ Changed the facts and requirements in several end-
of-chapter problems.
Chapter 6
∙ Updated real-world references.
∙ Expanded coverage of post-control period reporting
for primary beneficiaries and variable interest enti-
ties including an example of consolidated statement
preparation.
∙ Added and revised several end-of-chapter problems.
Chapter 7
∙ Reduced the size of Exhibit 7.1 containing exchange
rates for selected countries.
∙ Rewrote the section now titled Forward Contracts
that was previously titled Spot and Forward Rates.
∙ Moved the section on foreign currency borrowing
from the end of the chapter to immediately follow
the section on foreign currency transactions.
∙ Moved the portion of the IFRS section at the end of
the chapter that deals with foreign currency transac-
tions to immediately follow the section on foreign
currency borrowing.
∙ Expanded the learning objective related to how forward
contracts and foreign currency options can be used to
hedge foreign exchange risk to include understanding
what types of foreign exchange risk can be hedged.
∙ Added new learning objectives on the accounting
guidelines for derivatives and the basics of hedge
accounting.
∙ Updated real-world references including examples
of company practices, excerpts from annual reports,
and foreign exchange rates.
∙ Added language to more clearly explain the impact
that the accounting for a derivative financial instru-
ment used to hedge a foreign exchange risk has on
financial statements within the examples demon-
strating the accounting for various types of foreign
currency hedges.
∙ Updated the section at the end of the chapter that
summarizes the accounting for derivative financial
instruments under IFRS.
∙ Changed the facts in several end-of-chapter
problems.
∙ Updated the develop your skills assignments based
on actual exchange rates.
Chapter 8
∙ Updated references to actual company practice and
related excerpts from annual reports.
∙ In the section on Exchange Rates Used in Trans­
lation, added instruction to first read the related Dis-
cussion Question before continuing.
∙ Removed reference to the theoretical possibility of
translating income statement items at the current
exchange rate.
∙ Removed reference to a research study published in
1988 that investigated the weighting of functional
currency indicators.
∙ Moved the section on IFRS from the end of the
chapter to immediately after the section describing
U.S. authoritative literature.
∙ Changed facts in several end-of-chapter problems.
vii
Chapter 9
∙ Revised tables showing the allocation of partnership
income/loss across partners to provide additional
emphasis on the step-by-step nature of the income
distribution across partners.
∙ Changed the facts and requirements in several end-
of-chapter problems.
Chapter 10
∙ Split an existing end-of-chapter problem with two
unrelated parts into two separate problems.
∙ Added a new end-of-chapter problem related to
learning objectives 10-2 and 10-5.
∙ Changed the facts and requirements in several end-
of-chapter problems.
viii
Chapter 11
∙ Updated numerous references to the financial state-
ments of a wide variety of state and local govern-
ments such as the City of Baltimore, the City of
Houston, the City of Charlotte, and the City of
Dallas.
Chapter 12
∙ Provided coverage of new pronouncement: GASB
Statement No. 76, “The Hierarchy of Generally
Accepted Accounting Principles for State and Local
Governments.”
∙ Provided coverage of new pronouncement: GASB
Statement No. 77, “Tax Abatement Disclosures.”
∙ Updated references to the financial statements of
state and local governments such as the City of Los
Angeles, the City of Chicago, the City of Orlando,
and the City of Boston.
Students Solve the Accounting Puzzle
with 7th Edition Features
The approach used by Thinking Critically
Hoyle, Schaefer, and With this text, students gain a well-balanced apprecia-
Doupnik allows students to tion of the accounting profession. As Hoyle 7e introduces
them to the field’s many aspects, it often focuses on past
think critically about ac- controversies and present resolutions. The text shows the
counting, just as they will development of financial reporting as a product of intense
in their careers and as they and considered debate that continues today and will in the
future.
prepare for the CPA exam.
Read on to understand Readability
how students will succeed The writing style of the previous editions has been highly
as accounting majors and praised. Students easily comprehend chapter concepts
because of the conversational tone used throughout the
as future CPAs by using book. The authors have made every effort to ensure that the
­Fundamentals of Advanced writing style remains engaging, lively, and consistent.
Accounting, 7e.
Real-World Examples
Students are better able to relate what they learn to what they will en-
counter in the business world after reading these frequent examples. Quota-
tions, articles, and illustrations from Forbes, The Wall Street Journal, Time,
and Bloomberg BusinessWeek are incorporated throughout the text. Data
Confirming Pages
have been pulled from business, not-for-profit, and government financial
statements as well as official pronouncements.

Consolidation of Financial Information 41

EXHIBIT 2.1
Acquirer Target Deal Value
Recent Notable Business
Combinations AT&T DirecTV $47.4B
Berkshire Hathaway, Inc. Precision Castparts $32.0B
Visa, Inc. Visa Europe Ltd $23.3B
Facebook, Inc. WhatsApp $17.2B
MeadWestvaco RockTenn $16.0B
Intel Corporation Altera Corporation $15.0B
CVS Health Corporation Omnicare, Inc. $12.9B
Marriott Starwood Hotels Intl $12.2B
Merck Cubist $ 9.5B
Weyerhaeuser Plum Creek Timber $ 8.4B
Celgene Corporation Receptos, Inc. $ 7.2B
Cox Automotive Dealertrack Technologies $ 4.0B
FedEx TNT Express $ 4.8B
Expedia HomeAway $ 3.9B
Microsemi Corporation PMC-Sierra, Inc. $ 2.5B
Constellation Brands Ballast Point Brewing & Spirits $ 1.0B

manufacturing, and delivery, substantial savings can result. As an example, Oracle’s acquisi-
tion of Sun Microsystems creates synergies by enabling Oracle to integrate its software prod-
uct lines with Sun’s hardware specifications. The acquisition further allows Oracle to offer
complete systems made of chips, computers, storage devices, and software with an aim
toward increased efficiency and quality.2 Other cost savings resulting from elimination of
duplicate efforts, such as data processing and marketing, can make a single entity more profit- ix
able than the separate parent and subsidiary had been in the past. Such synergies often accom-
pany business combinations.
Although no two business combinations are exactly alike, many share one or more of the
following characteristics that potentially enhance profitability:
Discussion Questions
This feature facilitates student understanding of the underlying account-
ing principles at work in particular reporting situations. Similar to minicases,
these questions help explain the issues at hand in practical terms. Many
times, these cases are designed to demonstrate to students why a topic is
problematic and worth considering. First Pages

182 Chapter 4

Discussion Question
DOES GAAP UNDERVALUE POST-CONTROL STOCK ACQUISITIONS?
In Berkshire Hathaway’s 2012 annual report, Warren Buffett, in discussing the company’s
post-control step acquisitions of Marmon Holdings, Inc., observed the following:

Marmon provides an example of a clear and substantial gap existing between book
value and intrinsic value. Let me explain the odd origin of this differential.
Last year I told you that we had purchased additional shares in Marmon, raising our
ownership to 80% (up from the 64% we acquired in 2008). I also told you that GAAP
accounting required us to immediately record the 2011 purchase on our books at far less
than what we paid. I’ve now had a year to think about this weird accounting rule, but I’ve
yet to find an explanation that makes any sense—nor can Charlie or Marc Hamburg, our
CFO, come up with one. My confusion increases when I am told that if we hadn’t already
owned 64%, the 16% we purchased in 2011 would have been entered on our books at
our cost.
In 2012 (and in early 2013, retroactive to year end 2012) we acquired an additional 10%
of Marmon and the same bizarre accounting treatment was required. The $700 million
write-off we immediately incurred had no effect on earnings but did reduce book value
and, therefore, 2012’s gain in net worth.
The cost of our recent 10% purchase implies a $12.6 billion value for the 90% of
Marmon we now own. Our balance-sheet carrying value for the 90%, however, is $8

CPA Simulations billion. Charlie and I believe our current purchase represents excellent value. If we are
correct, our Marmon holding is worth at least $4.6 billion more than its carrying value.

Hoyle 7e provides How

instructors andthestudents
would you explain access fortotheCPA
accounting valuations Simulations
post-control that
step acquisitions correspond
to the Berk- to several key
shire Hathaway executives? Do you agree or disagree with the GAAP treatment of reporting additional
topics and chaptersinvestments
throughout the text. Students can complete these simulations online, allowing
in subsidiaries when control has previously been established?
them to practice advanced accounting concepts in a web-based interface that mimics the actual CPA
exam. There will be no hesitation or confusion when students sit for the real exam; they will know
exactly how to maneuver through the computerized test.
LO 4-10 Parent Company Sales of Subsidiary Stock—Acquisition Method
Record the sale of a subsidiary Frequently, a parent company will sell a portion or all of the shares it owns of a subsidiary.
(or a portion of its shares). For example, when General Electric Company reported the sale of its NBC Universal busi-
ness, it noted in its financial statements:
We transferred the assets of the NBCU business and Comcast transferred certain of its assets to
a newly formed entity, NBC Universal LLC (NBCU LLC). In connection with the transaction,
we received $6,197 million in cash from Comcast and a 49% interest in NBCU LLC. Comcast
holds the remaining 51% interest in NBCU LLC. We will account for our investment in NBCU
LLC under the equity method. As a result of the transaction, we expect to recognize a small
after-tax gain . . .

x Importantly, the accounting effect from selling subsidiary shares depends on whether the
parent continues to maintain control after the sale. If the sale of the parent’s ownership inter-
est results in the loss of control of a subsidiary as in the GE example above, it recognizes any
resulting gain or loss in consolidated net income.
If the parent sells some subsidiary shares but retains control, it recognizes no gains or losses
on the sale. Under the acquisition method, as long as control remains with the parent, transac-
 Consolidation of

End-of-Chapter Materials LO 2-10 38. On May 1, Burns Corporation acquired 100 percent of the outstanding ow
Corporation in exchange for $710,000 cash. At the acquisition date, Quig
As in previous editions, the end-of-chapter material remains a strength of the text. The sheer were as follows:

number of questions, problems, and Internet assignments test and therefore expand the students’ Book Va
knowledge of chapter concepts. ConfirmingCashPages.......................................... $ 95,0

Excel Spreadsheet Assignments extend specific problems and are located on. . .the . . . . . 7th
. . . . . . edition
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory. ........................
200,0
210,0
Instructor Resources page, with templated versions that can be provided to students for
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building and equipment (net) . . . . . . . . . . . . . . . . . . . . .
130,0
270,0
assignments. An Excel icon appears next to those problems that have corresponding Patented technology . spreadsheet
Confirming Pages
...........................
64 Chapter 2 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $905,0
assignments. Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $120,0
“Develop Your Skills”
74 Chapter 2
asks questions that address the four skills students Long-termneed
3. If the consideration transferred for an acquired firm exceeds the total fair value of the acquired firm’s
net assets, the residual amount is recognized in the consolidated financial statements as goodwill, an
liabilities.to . . . .master
. . . . . . . . . . . to
. . . . .pass
......... 510,0
Common stock ($5 par value). . . . . . . . . . . . . . . . . . . . . 210,0
the CPA exam: Research, Analysis, Spreadsheet, and Communication. Additional An icon indicates
capital . . . . . . . .when
EXHIBIT 2.10
Pushdown Accounting— intangible asset. When a bargain purchase occurs, individual
Smallport Company Balance Sheet at January 1 assets and liabilities acquired continue
paid-in ................. 90,0
Date of Acquisition to be recorded at their fair values and a gain on bargain purchase is recognized.
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 300,000

these skills are tested.4. Particular attention should be given to the recognition of intangible assets in business combinations.
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computers and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
600,000
1,200,000
Total liabilities and stockholders equity . . . . . . . . . . . .
700,000
(25,0
$905,0
An intangible asset must
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
be recognized in an acquiring firm’s financial statements if the asset arises
70,000
Total assets . . . . . . . . . . .from
. . . . . . .a. .legal
. . . . . . . or
. . . .contractual
. . . . . . . . . . . . right (e.g.,$trademarks,
2,870,000 copyrights, artistic materials, royalty agreements).
Liabilities . . . . . . . . . . . . . .If
. . .the
. . . . intangible
. . . . . . . . . . . . . . asset
. . . . . . . does
.... not represent a legal or contractual right, the intangible will still
be recog-
Burns
$ (250,000) directs Quigley to seek additional financing for expansion throu
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (100,000)
Additional paid-in capitalnized excess over if itpar is. capable
. . . . . . . . . . . of
. . . .being
. separated from
(20,000)the firm (e.g., customer lists, noncontractual
customer
issue. Consequently, Quigley will issue a set of financial statements sep
Additional paid-in capitalrelationships,from pushdown accounting unpatented . . . . . . . technology).(2,500,000)
parent to support its request for debt and accompanying regulatory filing
Retained earnings, 1/1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –0–
Total liabilities and equities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . pushdown accounting in order to show recent fair valuations for its assets
$ 2,870,000
Prepare a separate acquisition-date balance sheet for Quigley Corp
Example: Pushdown Accounting accounting.
Comprehensive (Estimated
To illustrate an application Time: 45
of pushdown accounting, to the
we use 65Exhibit
Minutes)
2.3 BigNetFollowing are the account balances of Miller Company and Rich-
and Smallport Com-
pany example presented mond Company as of December 31. The fair values of Richmond Company’s assets and liabilities are
previously in this chapter. If Smallport Company applies pushdown account-
Illustration ing,Note
its acquisition-date separately reported balance sheet would appear as presented in Exhibit 2.10:
that the valuesalso listed.
for each asset and liability in Smallport’s separate balance sheet above are iden-
tical to those reported in BigNet’s consolidated acquisition-date balance sheet. Develop Your Skills
Internal Reporting
Problem Pushdown accounting has several advantages for internal reporting. For example, it simplifies the con- Miller FASB ASC RESEARCH
Richmond AND ANALYSIS CASE—CONSIDERATION OR
Richmond
solidation process. If the subsidiary enters the acquisition-date fair value allocations into its records, Company Company Company
worksheet Entry A (to recognize the allocations originating from the fair-value adjustments) is not
needed. Amortizations of the excess fair value allocation (see Chapter 3) would be incorporated Book in
COMPENSATION?
ValuesBook Values Fair Values
subsequent periods as well. C
Despite some simplifications to the consolidation process, pushdown accounting does not address
12/31 12/31 12/31
NaviNow Company agrees to pay $20 million in cash to the four former owne
the many issues in preparing consolidated financial statements that appear in subsequent chapters of
Cashto .be. seen
this text. Therefore, it remains . . .how
. . .many
. . .acquired
. . . . .companies
. . . . . .will
. . choose
. . . . to. elect
accounting. For newly acquired subsidiaries that expect to issue new debt or eventually undergo an
. . . pushdown
. CPA
$ 600,000
skills
$ 200,000 $ 200,000
its assets
10.and liabilities.
Sloane, Inc.,These
issuesfour ownersshares
25,000 of TrafficEye developed
of its own commonand paten
stoc
Receivables . .investors
. . . . .with
. . .a .better
. . .understanding
. . . . . . . .of. the
. . company.
.. 900,000 300,000 time290,000
monitoring of traffic patterns on the nation’s top 200 frequently
initial public offering, fair
In summary, pushdown
values may provide
Inventory. . . . . . a. newly
accounting provides . . . .acquired
. . . . .subsidiary
. . . . . .the. .option
. . . .to. revalue
. its 1,100,000 600,000 820,000 shares of Benjamin Company. Benjamin will remain aconge
sepa
plans to combine the new technology with its existing global positioning syst
assets and liabilities to acquisition-date fair values in its separately reported financial statements. This
Buildings and
parentequipment (net) . . . shares
. . . .to. the
. . public
. fol- 9,000,000 800,000 Sloane record the issuance of these shares?
valuation option may be useful when the expects to offer the subsidiary ing900,000
substantial revenue increase.
As11.
partTo obtain all of contract,
the stock of Molly,alsoInc.,
agreesHarrison Corpora
lowing a period of planned improvements. Other benefits from pushdown accounting may arise when
Unpatented technology . . . . . . . . . . . . . . . . .
the subsidiary plans to issue debt and needs its separate financial statements to incorporate acquisition-
–0– –0– 500,000 of the acquisition NaviNow to pay additional a
In-process
date fair values and previously research
unrecognized intangibles inand development
their standalone ....
financial reports. –0– –0– ers 100,000 rison had to
upon achievement of pay $98,000
certain financialtogoals.
lawyers, accountants,
NaviNow will pay $8and a stoc
million to
1.
Accounts payable . . . . . . . . . . . . . . . . . . . . . .
What is a business combination?
(400,000) (200,000) (200,000)
TrafficEye if revenues
vices renderedfrom during
the combined system exceed
the creation of this$100 millioncombina
business over the
Questions
2. Notes
Describe the different payable
types of legal arrangements that can take place to create a business combination. (3,400,000) (1,100,000) (1,100,000)
estimates this contingent
in costs payment
associated to have
with the astock
probability adjusted
issuance. How present
will value
theseo
3. What does the term consolidated financial statements mean?
Totals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,800,000 $ 600,000 The four former owners have also been offered employment contracts w
$1,510,000
4. Within the consolidation process, what is the purpose of a worksheet?
5. Jones Company obtains all of the common stock of Hudson, system integration and performance enhancement issues. The employment
Common stock—$20 parInc.,value
by issuing . .50,000
. . . .shares
. . . of
. its own
$ (2,000,000)
stock. Under these circumstances, why might the determination of a fair value for the consideration
Problems service1.periods,
Whichhave of the following
nominal does
salaries not to
similar represent
those of aequivalent
primary employ
motiv
Common stock—$5 par value . . . . . . . . . . .
transferred be difficult? $ (220,000)
6. What is the accounting valuation basis for consolidating assets and liabilities in a business
sharing component over the next
a. Combinations arethree
oftenyears (if the employees
a vehicle remain
to accelerate with the
growth a
Additional paid-in capital . . . . . . . . . . . . . . . . (900,000) (100,000)
combination? LO 2-1 estimates to have a current fair value of $2 million. The four former owners o
7. How should a parent Retained
consolidate itsearnings, 1/1.and
subsidiary’s revenues . .expenses?
............... (2,300,000) (130,000) b. Cost savings can be achieved through elimination of du
stay on as employees of NaviNow for at least three years to help achieve the d
8. Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Morgan Company acquires all of the outstanding shares of Jennings, Inc., for cash. Morgan trans- (6,000,000) (900,000) Synergies
Shouldc.NaviNow mayfor
account bethe
available
contingentthrough
paymentsquick entrytoforthenew
promised for
fers consideration more than the fair value of the company’s net assets. How should the payment in
excess of fair valueExpenses
be accounted for in . .the. .consolidation
. . . . . . . process?
.................. 3,400,000 750,000
9. Catron Corporation is having liquidity problems, and as a result, it sells all of its outstanding stock to
as consideration
d. Largertransferred
firms inaretheless
acquisition
likely toorfail.
as compensation expense to
Totals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lambert, Inc., for cash. Because of Catron’s problems, Lambert is able to acquire this stock at less
$ (7,800,000) $ (600,000)
than the fair value of the company’s net assets. How is this reduction in price accounted for within 2. Which of the following is the best theoretical justification f
LO 2-2
Note: Parentheses indicate a credit balance.
the consolidation process?
a. In form the companies are one entity; in substance they
ASC RESEARCH CASE—DEFENSIVE INTANGIBLE ASSET
Additional Information (not reflected in the preceding figures) b. In form the companies are separate; in substance they ar
∙ On December 31, Miller issues 50,000 shares of its $20 par value
skills common stock forCPA
Ahorita
all of the
c. In form
Company
out-
and substance
manufactures thetransponders
wireless companies for
aresatellite
one entity.
applicati
hoy44953_ch02_039-088.indd 74
standing shares of Richmond Company. 08/13/16 12:32 PM d. In form
acquired Zelltech and substance
Company, the companies
which is primarily are its
known for separate.
software(AIC
com
∙ As part of the acquisition agreement, Miller agrees to payLO the2-3
former owners of Richmond but $250,000
also
3. manufactures a specialty
What is a statutory transponder under the trade name “Z-Tech
merger?
if certain profit projections are realized over the next three years. Miller calculates the acquisition- a. A merger approved by the Securities and Exchange Com
date fair value of this contingency at $100,000.
b. An acquisition involving the purchase of both stock and
∙ In creating this combination, Miller pays $10,000 in stock issue costs and $20,000 in accounting and
legal fees. c. A takeover completed within one year of the initial tend
d. A business combination in which only one company con
Required LO 2-4 4. FASB ASC 805, “Business Combinations,” provides prin
hoy44953_ch02_039-088.indd 87
a. Miller’s stock has a fair value of $32 per share. Using the acquisition method: acquired business. When the collective fair values of the
1. Prepare the necessary journal entries if Miller dissolves Richmond so it is no longer a separate liabilities assumed exceed the fair value of the consideratio
legal entity. a. Recognized as an ordinary gain from a bargain purchase
2. Assume instead that Richmond will retain separate legal incorporation and maintain its own b. Treated as negative goodwill to be amortized over the p
accounting systems. Prepare a worksheet to consolidate the accounts of the two companies.
c. Treated as goodwill and tested for impairment on an ann
b. If Miller’s stock has a fair value of $26 per share, describe how the consolidated balances would dif-
fer from the results in requirement (a). d. Applied pro rata to reduce, but not below zero, the am
current assets of the acquired firm.
LO 2-8 5. What is the appropriate accounting treatment for the value a
opment acquired in a business combination? xi
a. Expense upon acquisition.
b. Capitalize as an asset.
c. Expense if there is no alternative use for the assets us
hoy44953_ch02_039-088.indd 64 08/13/16 12:32 PM
technological feasibility has yet to be reached.
Connect Accounting for Fundamentals
of Advanced Accounting, 7e
The Seventh Edition of Fundamentals of Advanced Accounting has a full Connect package,
with the following features available for instructors and students.
∙ (New for 7e!) SmartBook ® is the market-leading adaptive study resource that is proven
to strengthen memory recall, increase retention, and boost grades. SmartBook, powered by
LearnSmart, is the first and only adaptive reading experience designed to change the way
students read and learn. SmartBook delivers a personalized reading experience by high-
lighting the most impactful concepts a student needs to learn at that moment in time. As
a student engages with SmartBook, the reading experience continuously adapts by high-
lighting content based on what the student has mastered or is ready to learn. This ensures
that the student stays focused on the content he or she needs to learn, while simultaneously
promoting long-term retention of material. Both students and Instructors can use Smart-
Book’s real-time reports to quickly identify the concepts that require more attention from
individual students—or the entire class. The end result? Students are more engaged with
course content, can better prioritize their time, and come to class ready to participate.
∙ The End-of-Chapter Content in Connect provides a robust offering of review and ques-
tion material designed to aid and assess the student’s retention of chapter content. The
End-of-Chapter content is composed of both static and algorithmic versions of the prob-
lems in each chapter, which are designed to challenge students using McGraw-Hill Edu-
cation’s state-of-the-art online homework technology. Connect helps students learn more
efficiently by providing feedback and practice material when and where they need it. Con-
nect grades homework automatically, and students benefit from the immediate feedback
that they receive, particularly on any questions they may have missed.

Example of End-of-Chapter Problem

Prepare a consolidated balance sheet for Pratt and Spider as of December 31, 2018.

PRATT COMPANY AND SUBSIDIARY

Consolidated Balance Sheet
December 31, 2018
Assets Liabilities and Owners’ Equity
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . .

 
Total assets . . . . . . . . . . . . . . . . . . . . .  Total liabilities and equities . . . . 

∙ The Test Bank for each chapter has been updated for the 7th edition to stay current with
new and revised chapter material, with all questions available for assignment through Con-
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Acknowledgments
We could not produce a textbook of the quality and scope of Fundamentals of Advanced
Accounting without the help of a great number of people. Special thanks go to the following:
∙ Gregory Schaefer for his Chapter 2 descriptions of recent business combinations.
∙ Joyce van der Laan Smith of the University of Richmond and Paul Copley of James Madi-
son University for their work on detailed reviews of the Sixth Edition. Their feedback and
direction were instrumental during the revision process.
∙ Ilene Leopold Persoff of Long Island University (LIU Post) for her work on detailed
reviews of the Sixth Edition and for checking the Seventh Edition manuscript, solutions
manuals, and test bank files for accuracy. Ilene’s subject matter knowledge, detail-oriented
nature, and quality of work were instrumental in ensuring that this edition stayed accurate,
relevant, and of tremendous quality.
Additionally, we would like to thank Anna Lusher of Slippery Rock University, for updating
and revising the PowerPoint presentations; Jack Terry of ComSource Associates for updat-
ing the Excel Template Exercises for students to use as they work the select end-of-chapter
material; Stacie Hughes of Athens State University, Mark McCarthy of East Carolina Uni-
versity, and Beth Kobylarz of Accuracy Counts for checking the text and Solutions Manual
for accuracy; John Abernathy of Kennesaw State University for checking the test bank for
accuracy; and Barbara Gershman of Northern Virginia Community College for checking the
PowerPoints.
We also want to thank the many people who completed questionnaires and reviewed the
book. Our sincerest thanks to them all:

Thomas Collins Zane Swanson

University of Wisconsin–Platteville University of Central Oklahoma
Charles Lewis Amy David
Houston Community College Queens College
Waqar Ahmed John Abernathy
University of Illinois Kennesaw State University
Michael Cohen David He
Rutgers University Johns Hopkins University
Ling Harris Suzanne Wright
University of South Carolina Penn State University
Stacie Hughes
Athens State University

We also pass along a word of thanks to all the people at McGraw-Hill Education who
participated in the creation of this edition. In particular, Dana Pauley, Senior Content Project
Manager; Jennifer Pickel, Buyer; Egzon Shaqiri, Designer; Kevin Moran, Associate Direc-
tor of Digital Content and Product Developer; Becky Olson, Executive Brand Manager; Tim
Vertovec, Managing Director; Brian Nacik, Lead Assessment Content Project Manager; and
Zach Rudin, Marketing Manager all contributed significantly to the project, and we appreci-
ate their efforts.

xv
Brief Contents
Walkthrough ix 7. Foreign Currency Transactions and Hedging
1. The Equity Method of Accounting for Foreign Exchange Risk 319
Investments 1 8. Translation of Foreign Currency Financial
2. Consolidation of Financial Information 39 Statements 385
3. Consolidations—Subsequent to the Date of 9. Partnerships: Formation and Operation 445
Acquisition 89 10. Partnerships: Termination and
4. Consolidated Financial Statements and Liquidation 483
Outside Ownership 155 11. Accounting for State and Local Governments
5. Consolidated Financial Statements— (Part 1) 517
Intra-Entity Asset Transactions 211 12. Accounting for State and Local Governments
6. Variable Interest Entities, Intra-Entity (Part 2) 575
Debt, Consolidated Cash Flows, and Other
Issues 261 INDEX 631

xvi
Contents
Walkthrough ix
Chapter One
The Equity Method of Accounting for
Investments 1
The Reporting of Investments in Corporate Equity
Securities 1
Fair-Value Method 2
Cost Method (Investments in Equity Securities without
Readily Determinable Fair Values) 2
Consolidation of Financial Statements 3
Discussion Question: Did the Cost Method Invite
Earnings Manipulation? 4
Equity Method 4
International Accounting Standard 28—Investments in
Associates 5
Application of the Equity Method 5
Criteria for Utilizing the Equity Method 5
Accounting for an Investment—The Equity Method 7
Equity Method Accounting Procedures 9 Standards 63
Excess of Investment Cost over Book Value Acquired 9
Discussion Question: Does the Equity Method Really
Apply Here? 10
The Amortization Process 12
Equity Method—Additional Issues 14
Reporting a Change to the Equity Method 14
Reporting Investee’s Other Comprehensive Income and
Irregular Items 16
Reporting Investee Losses 16
Reporting the Sale of an Equity Investment 17
Deferral of Intra-Entity Gross Profits in Inventory
Downstream Sales of Inventory 19
Upstream Sales of Inventory 20
Financial Reporting Effects and Equity Method
Criticisms 21
Equity Method Reporting Effects 21
Criticisms of the Equity Method 22
Fair-Value Reporting for Equity Method Investments
Summary 24
Chapter Two
Consolidation of Financial Information
Expansion through Corporate Takeovers 40
Reasons for Firms to Combine 40
Facebook and WhatsApp 42
AT&T and DirecTV 42
MeadwestVaco and Rock-Tenn 43
Business Combinations, Control, and Consolidated
Financial Reporting 43
Business Combinations—Creating a Single Economic
Entity 44
Control—An Elusive Quality 45
Consolidation of Financial Information 46
Financial Reporting for Business Combinations 47
The Acquisition Method 47
Consideration Transferred for the Acquired Business 47
Contingent Consideration: An Additional Element of
Consideration Transferred 47
Assets Acquired and Liabilities Assumed 48
Goodwill and Gains on Bargain Purchases 49
Procedures for Consolidating Financial Information 49
Acquisition Method When Dissolution Takes Place 50
Related Costs of Business Combinations 54
The Acquisition Method When Separate Incorporation Is
Maintained 55
Acquisition-Date Fair-Value Allocations—
Additional Issues 60
Intangibles 60
Preexisting Goodwill on Subsidiary’s Books 61
Acquired In-Process Research and Development 62
Convergence between U.S. and International Accounting
Summary 63
Appendix A
Legacy Methods of Accounting for Business
Combinations 67
Appendix B
Pushdown Accounting 72
Chapter Three
Consolidations—Subsequent to the Date of
Acquisition 89
18 Consolidation—The Effects Created by the Passage of
Time 90
Consolidated Net Income Determination 90
The Parent’s Choice of Investment Accounting 90
Investment Accounting by the Acquiring Company 90
Internal Investment Accounting Alternatives—The
Equity Method, Initial Value Method, and Partial Equity
23 Method 91
Subsequent Consolidation—Investment Recorded by the
Equity Method 92
Acquisition Made during the Current Year 92
39 Determination of Consolidated Totals 94
Consolidation Worksheet 96
Consolidation Subsequent to Year of Acquisition—Equity
Method 98
Subsequent Consolidations—Investment Recorded Using
Initial Value or Partial Equity Method 103
Acquisition Made during the Current Year 103
Consolidation Subsequent to Year of Acquisition—Initial
Value and Partial Equity Methods 107
Discussion Question 111
xvii
xviii Contents
Discussion Question: How Does a Company Really
Decide Which Investment Method to Apply? 112
Excess Fair Value Attributable to Subsidiary Long-Term
Debt: Post-Acquisition Procedures 113
Goodwill Impairment 115
Assigning Goodwill to Reporting Units 116
Qualitative Assessment Option 116
Testing Goodwill for Impairment 117
Illustration—Accounting and Reporting for a Goodwill
Impairment Loss 118
Reporting Units with Zero or Negative Carrying
Amounts 119
Goodwill Impairment Simplified—Proposed Accounting
Standards Update (ASU) 119
Comparisons with International Accounting Standards 120
Amortization and Impairment of Other Intangibles 121
Contingent Consideration 122
Accounting for Contingent Consideration in Business
Combinations 122
Summary 123
Appendix
Private Company Accounting for Business
Combinations 127
Chapter Four
Consolidated Financial Statements and Outside
Ownership 155
Consolidated Financial Reporting in the Presence of a
Noncontrolling Interest 156
Subsidiary Acquisition-Date Fair Value in the Presence
of a Noncontrolling Interest 157
Discussion Question 158
Allocating Consolidated Net Income to the Parent
and Noncontrolling Interest 161
Partial Ownership Consolidations
(Acquisition Method) 162
Illustration—Partial Acquisition with No Control
Premium 162
Illustration—Partial Acquisition with Control Premium 170
Effects Created by Alternative Investment Methods 174
Revenue and Expense Reporting for Midyear
Acquisitions 175
Consolidating Postacquisition Subsidiary Revenue
and Expenses 175
Acquisition Following an Equity Method Investment 177
Step Acquisitions 177
Control Achieved in Steps—Acquisition Method 177
Example: Step Acquisition Resulting in Control—Acquisition
Method 177
Worksheet Consolidation for a Step Acquisition
(Acquisition Method) 179
Example: Step Acquisition Resulting after Control Is
Obtained 181
Discussion Question: Does GAAP Undervalue Post-
Control Stock Acquisitions? 182
Parent Company Sales of Subsidiary Stock—Acquisition
Method 182
Cost-Flow Assumptions 184
Accounting for Shares That Remain 184
Comparisons with International Accounting
Standards 184
Summary 185
Chapter Five
Consolidated Financial Statements—­
Intra-Entity Asset Transactions 211
Intra-Entity Inventory Transfers 212
The Sales and Purchases Accounts 212
Intra-Entity Gross Profit—Year of Transfer (Year 1) 213
Discussion Question: Earnings Management 214
Intra-Entity Gross Profit—Year Following Transfer
(Year 2) 215
Intra-Entity Gross Profit—Effect on Noncontrolling
Interest 217
Intra-Entity Inventory Transfers Summarized 218
Intra-Entity Inventory Transfers Illustrated: Parent Uses
Equity Method 219
Effects of Alternative Investment Methods on
Consolidation 227
Discussion Question: What Price Should We Charge
Ourselves? 230
Intra-Entity Land Transfers 232
Accounting for Land Transactions 232
Eliminating Intra-Entity Gains—Land Transfers 232
Recognizing the Effect on Noncontrolling Interest—Land
Transfers 234
Intra-Entity Transfer of Depreciable Assets 234
Deferral and Subsequent Recognition of Intra-Entity
Gains 235
Depreciable Asset Intra-Entity Transfers Illustrated 235
Years Following Downstream Intra-Entity Depreciable Asset
Transfers—Parent Uses Equity Method 238
Effect on Noncontrolling Interest—Depreciable Asset
Transfers 239
Summary 239
Chapter Six
Variable Interest Entities, Intra-Entity
Debt, Consolidated Cash Flows, and Other
Issues 261
Consolidation of Variable Interest Entities 261
What Is a VIE? 262
Consolidation of Variable Interest Entities 263
Procedures to Consolidate Variable Interest Entities 267
Consolidation of a Primary Beneficiary and VIE
Illustrated 268
Comparisons with International Accounting
Standards 271
Intra-Entity Debt Transactions 272

Acquisition of Affiliate’s Debt from an Outside Party 273
Accounting for Intra-Entity Debt Transactions—Individual
Financial Records 273
Effects on Consolidation Process 275
Assignment of Retirement Gain or Loss 276
Intra-Entity Debt Transactions—Years Subsequent to
Effective Retirement 276
Discussion Question: Who Lost This $300,000?
Subsidiary Preferred Stock 279
Consolidated Statement of Cash Flows 281
Acquisition Period Statement of Cash Flows 282
Statement of Cash Flows in Periods Subsequent to
Acquisition 286
Consolidated Earnings per Share 286
Subsidiary Stock Transactions 288
Changes in Subsidiary Value—Stock Transactions 289
Subsidiary Stock Transactions—Illustrated 292
Summary 296
Chapter Seven
Foreign Currency Transactions and Hedging
Foreign Exchange Risk 319
Foreign Exchange Markets 320
Exchange Rate Mechanisms 320
Foreign Exchange Rates 320
Foreign Currency Forward Contracts 321
Foreign Currency Options 322
Foreign Currency Transactions 323
Accounting Issue 324
Balance Sheet Date before Date of Payment 325
International Accounting Standard 21—The Effects of
Changes in Foreign Exchange Rates 327
Foreign Currency Borrowing 327
Foreign Currency Loan 328
Hedges of Foreign Exchange Risk 329
Derivatives Accounting 329
Fundamental Requirement of Derivatives Accounting 330
Determination of Fair Value of Derivatives 330
Accounting for Changes in the Fair Value of
Derivatives 330
Hedge Accounting 331
Nature of the Hedged Risk 331
Hedge Effectiveness 332
Hedge Documentation 332
Hedging Combinations 332
Hedges of Foreign Currency Denominated Assets and
Liabilities 335
Cash Flow Hedge 335
Fair Value Hedge 335
Forward Contract Used to Hedge a Foreign Currency
Denominated Asset 335
Forward Contract Designated as Cash Flow Hedge
Forward Contract Designated as Fair Value Hedge
Discussion Question: Do We Have a Gain or What? 342
Cash Flow Hedge versus Fair Value Hedge 343
Contents xix
Foreign Currency Option Used to Hedge a Foreign
Currency Denominated Asset 344
Option Designated as Cash Flow Hedge 345
Option Designated as Fair Value Hedge 347
Hedges of Unrecognized Foreign Currency
Firm Commitments 350
Forward Contract Used as Fair Value Hedge of a Firm
277 Commitment 350
Option Used as Fair Value Hedge of Firm Commitment 352
Hedge of Forecasted Foreign Currency Denominated
Transaction 355
Forward Contract Cash Flow Hedge of a Forecasted
Transaction 355
Option Designated as a Cash Flow Hedge
of a Forecasted Transaction 357
Use of Hedging Instruments 358
The Euro 360
International Financial Reporting Standard 9—Financial
Instruments 360
Summary 360
Chapter Eight
Translation of Foreign Currency Financial
Statements 385
Exchange Rates Used in Translation 386
Discussion Question: How Do We Report This? 387
Translation Adjustments 388
Balance Sheet Exposure 388
Translation Methods 389
Current Rate Method 389
Temporal Method 390
Translation of Retained Earnings 391
Complicating Aspects of the Temporal Method 392
Calculation of Cost of Goods Sold 392
Application of the Lower-of-Cost-or-Net-Realizable-Value
Rule 393
Property, Plant, and Equipment, Depreciation, and
Accumulated Depreciation 393
Gain or Loss on the Sale of an Asset 393
Treatment of Translation Adjustment 394
Authoritative Guidance 394
Determining the Appropriate Translation Method 395
Highly Inflationary Economies 396
Appropriate Exchange Rate 397
International Accounting Standard 21—The Effects of
Changes in Foreign Exchange Rates 398
The Translation Process Illustrated 399
Translation of Financial Statements—Current
Rate Method 401
Translation of the Balance Sheet 402
Translation of the Statement of Cash Flows 404
337 Remeasurement of Financial
340 Statements—Temporal Method 404
Remeasurement of the Income Statement 405
Remeasurement of the Statement of Cash Flows 407
Another random document with
no related content on Scribd:
“Prettiness, as I understand it, is a quality of the personal
appearance which gives to the beholder a pleasurable sensation.”
“Something of the sort.”
“Ah.... Then, what causes it? It is intangible. Let us examine concrete
examples. Let us stand side by side Mary Jenkins, who is said to
possess this quality, and—shall we say?—Mrs. Bogardus, who is
reputed not to possess it. Why is one pretty and the other quite the
opposite of pretty?” He shook his head. “I confess I had never
become consciously aware of this difference between women....”
“What?”
He opened his eyes in mild surprise at the force of her exclamation.
“As a matter of fact,” he said, patiently, “I do not recall taking special
notice of any individual woman.... As to this matter of prettiness—
what constitutes it? What assembling of features and contours
create a pleasant sensation in the beholder, and why?... Perhaps
you noted how I have been scrutinizing you this morning?”
“I most certainly did.”
“Um!... It was for the purpose of determining if your appearance
aroused pleasant sensations in myself.”
“And did it?”
He wrinked his eyes behind his glasses and pushed stiff fingers
through his hair. “It is difficult to determine with accuracy, or to state
in terms the degree of pleasure derived, but I am almost certain that
I derive a mild satisfaction from regarding you.”
“I—I am overwhelmed,” said Carmel, and with abruptness she
passed through the wicket and out into the composing room, where
she sat down in Tubal’s rope-bottomed chair, breathless with
laughter.
“Oh, Tubal,” she said, “what sort of creature is he anyhow?”
“The Prof.?”
She nodded weakly.
“H’m.... The Prof.’s a kind of cabbage that never headed up,” said
Tubal, with finality. “He’s got all the roots and leaves, like that kind of
a cabbage, and, sim’lar, he hain’t no idee how to fold ’em up, or why
he’s a cabbage, nor that cabbages is the chief ingredient of
sauerkraut.”
“Yes,” said Carmel, “that’s it.” And for a long time after that she
continued to think of Evan Pell as a cabbage which had grown to
maturity without fulfilling a cabbage’s chief object in life, which is to
head. “Only,” she said, “he’s really just the opposite. He’s never done
anything but come to head. He’s comatose from his eyebrows to his
toes.”
The second issue of the Free Press had brought faint
encouragement. There had been a slight increase in advertising, due
to Carmel’s solicitations, but her pleasure in this growth was
somewhat dimmed by a guilty feeling that it was not due to any merit
of the paper, or of her solicitations, but to a sort of rudimentary
gallantry on the part of a few merchants.... Perhaps half a dozen
men had lounged in to subscribe, investing a dollar and a half in
curiosity.... But, to put the worst face on it, she had held her own.
She really felt she had improved the paper. The columns of
personals, which had been intrusted to Evan Pell, were full of items.
He had shown an unusual aptitude for observing the minutiæ of the
community. Having observed, he would have reported in the
language of a treatise on sociology, but Carmel referred him to the
files, and admonished him to study the style of the late Uncle Nupley.
This he had done grimly, ironically, and the result was a parrotlike
faithfulness.... He had also read and corrected all the proofs, to the
end that the sensibilities of the community be not offended by
grammatical gaucheries.
He had been offended close to resignation when Carmel insisted
upon running, in inch-tall, wooden type—across the top of the first
page—this query:
WHO IS THE HANDSOMEST MAN IN GIBEON
That was her great idea, born of her interview with Lancelot Bangs.
“If papers run beauty contests for women,” she said, “why not run
handsome contests for men?... Anyhow, it’ll be fun, and I’m entitled
to a little pleasure. Men are vain. It will make talk, and talk is
advertising, and advertising pays.”
Evan inveighed against the scheme as undignified, stultifying, and
belittling to a dignified profession.
“If it brings in subscriptions—and dollars,” said Carmel, “we should
worry!”
Evan closed his eyes in pain. “We should worry!... I beg of you....
That barbaric phrase! The basest argot. Our newspapers should be
the palladium of the purity of the language. If such expressions are
tolerated——” He stopped abruptly because his mind could not
encompass the horrors which would result from their toleration.
“Anyhow, I’m going to do it—and you’ll see. A regular voting.
Coupons and everything. We’ll have a six months’ subscription worth
fifty votes, a year’s subscription worth a hundred votes.”
“But—er—who will they vote for?”
“Just wait,” she said.
Following which she proceeded with enthusiasm. First she printed
the rules of the contest in the Free Press, and then she went to
Tubal.
“I want to stick things up all over the township,” she said, “telling
about it.”
“We got a mess of yaller stock,” he said. “You write it out and I’ll print
it, and we’ll make the Prof. go and paste ’em up.”
So it was done, and on a day Gibeon awoke to find itself placarded
with large yellow notices making it know that the Free Press was in a
fever to discover who was considered the handsomest man in town,
and to read the paper for particulars. Carmel was right—it caused
talk....
In other matters she was feeling her way, and the way was not plain
to her. Of petty news there was aplenty, and this she printed. She
also printed a trifling item about a traveling salesman who had been
“making” the territory for years in a buggy, and who had been
detected in the act of smuggling a few bottles of liquor over the
border in his sample case, thus adding to a meager income.
“There’s your vast liquor traffic,” she said to Evan Pell, “a poor, fat
little drummer with six bottles of whisky.”
“Um!... Who arrested him?”
“Deputy Jenney,” she said.
“There is,” said Evan, “a phrase which I have noted in the public
prints. It is, ‘strangling competition.’”
“What do you mean?”
“Why—er—if you were engaged in a—profitable enterprise, and
some individual—er—encroached, you would abate him, would you
not? That is the ethics of business.”
“Do you infer this drummer was abated as a competitor?”
“Oh, not in the least—not in the least!” He spoke airily, as one who
disposes of a troublesome child.
The incident, small as it was, troubled her. Evan Pell, by his cryptic
utterances, set her thinking.... If her imagination had not tricked her
wholly there was a reticence about Gibeon; there was something
Gibeon hid away from her.... A thing was transpiring which Gibeon
did not wish to be known—at least the powerful in Gibeon.... She
had encountered whisperings and slynesses.... She laughed at
herself. She would be seeing specters presently, she told herself....
But there was the disappearance of Sheriff Churchill. There was the
warning note to herself. There were many petty incidents such as the
one in Lancelot Bangs’s studio. But why connect them with illicit
traffic in intoxicants?... It was absurd to imagine an entire town
debauched by the gainfulness of whisky running.... It were a matter
best left alone.
And so, pursuing her policy of feeling her way, the current issue of
the Free Press was quite innocuous—save for what is known
technically as a “follow-up” on the subject of Sheriff Churchill, and an
editorial in which was pointed out the lethargy of official Gibeon in
assailing the mystery.
As she was leaving the hotel after luncheon that day, she
encountered Abner Fownes making his progress down the street. It
was a slow, majestic progress, and quite impressive. Mr. Fownes
carried himself with an air. He realized his responsibilities as a
personage, and proceeded with the air of a statesman riding in a
victoria through a cheering crowd. He spoke affably and
ostentatiously to everyone, but when he met Carmel face to face, he
paused.
“Um!... A hum!... I have read the paper—read it all.”
“I hope it pleased you.”
“It did not,” said Mr. Fownes.
“Indeed! What fault did you find?”
“You didn’t consult with me.... Told you to consult with me.... Number
of things shouldn’t have been mentioned. Editorial on Churchill—bad
business.... Young woman, you can see past the end of your nose.”
“I hope so.”
“Didn’t I make myself plain?”
“You did.”
“Um!... Hem!... No time for nonsense. After this—want to see every
line goes in that paper.”
“Before it is published?” Carmel was stirred to antagonism, but
forced herself to speak without heat.
“Before it’s published.... I’ll tell you what to print and what not to
print.”
“Oh,” she said, softly, “you will!”
“I own that paper—practically.... I let it live. You’re dependent on me.”
Carmel’s eyes snapped now; she was angry. “I fancied I owned the
Free Press,” she said.
“Just so long as I let you—and I’ll let you as long as you—edit it—er
—conservatively.”
“And conservatively means so long as I print what you want printed,
and omit what you wish omitted?”
“Exactly,” he said. “You’ve kept that schoolteaching fellow after I told
you not to.”
She paused a moment, and then she said, very quietly and slowly, “I
think, Mr. Fownes, that you and I have got to come to an
understanding.”
“Exactly what I’m getting at.”
“Very well, now please listen carefully, and I’m sure you’ll
understand.... At this moment I own the Free Press. Until your
chattel mortgage falls due—and that is two months away—I shall
continue to own it.... During that time I shall edit it as I see fit. I think
that is clear.... I shall ask no advice from you. I shall take no dictation
from you. What I believe should be printed, I shall print.... Good
afternoon, Mr. Fownes.”
She brushed past him and walked rapidly toward the office; Mr.
Fownes stood for a moment frowning; then he turned his round head
upon his shoulders—apparently there was no neck to assist in the
process—and stared after her. It was not an angry stare, nor a
threatening stare. Rather it was appraising. If Carmel could have
studied his face, and especially his eyes, at that moment, she would
have wondered if he were so fatuous as she supposed. She might
even have asked herself if he were really, as certain people in
Gibeon maintained, nothing but a bumptious figurehead, used by
stronger men who worked in his shadow.... There was something in
Abner Fownes’s eyes which was quite worthy of remark; but perhaps
the matter most worthy of consideration was that he manifested no
anger whatever—as a vain man, a little man, bearded as he had
been by a mere girl, might have done....
He peered after her briefly, then, by a series of maneuvers, set his
face again in the direction he had been traveling, and proceeded
magnificently on his way.... Carmel would have been more disturbed,
and differently disturbed, could she have seen into the man’s mind
and read what was passing in its depths. His thoughts had not so
much to do with Carmel as an editor as with Carmel as a woman.
 CHAPTER VII
CARMEL entered the office of the Free Press, after her encounter
with Abner Fownes, in a temper which her most lenient friend could
not describe as amiable. It was no small part of Carmel’s charm that
she could be unamiable interestingly. Her tempers were not set
pieces, like the Niagara Falls display at a fireworks celebration. They
did not glow and pour and smoke until the spectators were tired of
them and wanted to see something else. Rather they were like
gorgeous aërial bombs which rent the remote clouds with a
detonation and lighted the heavens with a multitude of colored stars.
Sometimes her choicest tempers were like those progressive bombs
which keep on detonating a half a dozen times and illuminating with
different colored stars after each explosion. This particular temper
was one of her best.
“From now on,” she said to nobody in particular, and not at all for the
purpose of giving information, “this paper is going to be run for one
single purpose. It’s going to do everything that pompous little fat
man, with his ears growing out of his shoulders, doesn’t want it to.
It’s going to hunt for things he doesn’t like. It is going to annoy and
plague and prod him. If a paper like this can make a man like him
uncomfortable, he’ll never know another peaceful moment....”
Evan Pell looked up from his table—over the rims of his spectacles
—and regarded her with interest.
“Indeed!” he said. “And what, if I may ask, has caused this—er—
declaration of policy?”
“He looked at me,” Carmel said, “and he—he wiggled all his chins at
me.”
Tubal thrust his head through the doorway. “What’d he do?” he
demanded, belligerently. “If he done anythin’ a gent shouldn’t do to a
lady I’ll jest ca’mly walk over there and twist three-four of them chins
clean off’n him.”
“I wish you would.... I wish you would.... But you mustn’t.... He gave
me orders. He told me I was to let him read every bit of copy which
went into this paper. He said I must have his O. K. on everything I
print.”
“Ah!” said Evan Pell. “And what did you rejoin?”
“I told him this was my paper, and so long as it was mine, I should do
exactly what I wanted with it, and then I turned my back and walked
away leaving him looking like a dressed-up mushroom—a fatuous
mushroom.”
“A new variety,” said Pell.
“I—I’ll make his life miserable for sixty days anyhow.”
“If,” said Pell, “he permits you to continue for sixty days.”
“I’ll continue, not for sixty days, but for years and years and years—
till I’m an old, gray-headed woman—just to spite him. I’ll make this
paper pay! I’ll show him he can’t threaten me. I’ll——”
“Now, Lady,” said Tubal, “if I was you I’d set down and cool off. If
you’re spoilin’ fer a fight you better go into it level-headed and not
jest jump in flailin’ your arms like a Frenchy cook in a tantrum. Abner
Fownes hain’t no infant to be spanked and put to bed. If you calc’late
to go after his scalp, you better find out how you kin git a grip onto
his hair.”
“And,” said Pell, “how you can prevent his—er—getting a grip on
yours.”
“I don’t believe he’s as big a man as he thinks he is,” said Carmel.
“I have read somewhere—I do not recall the author at the moment—
a word of advice which might apply to this situation. It is to the effect
that one should never underestimate an antagonist.”
“Oh, I shan’t. I’ll cool down presently, and then I’ll be as cold-blooded
and calculating as anybody. But right now I—I want to—stamp on his
pudgy toes.”
The telephone interrupted and Evan Pell put the receiver to his ear.
“... Yes, this is the Free Press.... Please repeat that.... In Boston last
night?... Who saw him? Who is speaking?” Then his face assumed
that blank, exasperated look which nothing can bring in such
perfection as to have the receiver at the other end of the line hung
up in one’s ear. He turned to Carmel.
“The person”—he waggled his thumb toward the instrument—“who
was on the wire says Sheriff Churchill was seen in Boston last
night?”
“Alive?”
“Alive.”
“Who was it? Who saw him?”
“When I asked that—he hung up the receiver in my ear.”
“Do you suppose it is true?”
“Um!... Let us scrutinize the matter in the light of logic—which it is
your custom to ridicule. First, we have an anonymous
communication. Anonymity is always open to suspicion. Second, it is
the newspaper which is informed—not the authorities. Third, it is the
newspaper which has been showing a curiosity as to the sheriff’s
whereabouts—er—contrary to the wishes of certain people....”
“Yes....”
“From these premises I would reason: first, that the anonymous
informer wishes the fact to be made public; second, that he wishes
this paper to believe it; third, that, if the paper does believe it, it will
cease asking where the sheriff is and why; and fourth, that if this
report is credited, there will be no search by anybody for a corpus
delicti.”
“A corpus delicti! And what might that be?”
Evan Pell sighed with that impatient tolerance which one exhibits
toward children asking questions about the obvious.
“It has been suggested,” he said, “that Sheriff Churchill has been
murdered. The first requisite in the establishment of the commission
of a murder is the production of the corpus delicti—the body of the
victim. If the body cannot be produced, or its disposal established,
there can be no conviction for the crime. In short, a murder requires
the fact of a dead man, and until the law can be shown a veritable
body it is compelled, I imagine, to presume the victim still alive. Here,
you will perceive, the effort is to raise a presumption that Sheriff
Churchill is not a corpus delicti.”
“Then you don’t believe it?”
“Do you?”
“I—I don’t know. Poor Mrs. Churchill! For her sake I hope it is true.”
“H’m!... If I were you, Miss Lee, I would not inform Mrs. Churchill of
this—without substantiation.”
“You are right. Nor shall I print it in the paper. You believe some one
is deliberately imposing upon us?”
“My mind,” said Evan Pell, “has been trained for years to seek the
truth. I am an observer of facts, trained to separate the true from the
false. That is the business of science and research. I think I have
made plain my reasons for doubting the truth of this message.”
“So much so,” said Carmel, “that I agree with you.”
Evan smiled complacently. “I fancied you could not do otherwise,” he
said. “Perhaps you will be further convinced if I tell you I am quite
certain I recognized the voice which gave the message.”
“Are you sure? Who was it?”
“I am certain in my own mind, but I could not take my oath in a court
of law.... I believe the voice was that of the little hunchback known
locally as Peewee Bangs.”
“The proprietor of the Lakeside Hotel?”
Evan nodded.
“What is this Lakeside Hotel?” Carmel asked. “I’ve heard it
mentioned, and somehow I’ve gotten the idea that it was—peculiar.”
Tubal interjected an answer before Evan Pell could speak. “It’s a
good place for sich as you be to keep away from. Folks drives out
there in automobiles from the big town twenty-thirty mile off, and has
high jinks. Before prohibition come in folks said Peewee run a blind
pig.”
“He seems very friendly with the local politicians.”
“Huh!” snorted Tubal.
“I don’t understand Gibeon,” Carmel said. “Of course I haven’t been
here long enough to know it and to know the people, but there’s
something about it which seems different from other little towns I’ve
known. The people look the same and talk the same. There are the
same churches and lodges and the reading club and its auxiliaries,
and I suppose there is the woman’s club which is exclusive, and all
that. But, somehow, those things, the normal life of the place, affect
me as being all on the surface, with something secret going on
underneath.... If there is anything hidden, it must be hidden from
most of the people, too. The folks must be decent, honest,
hardworking. Whatever it is, they don’t know.”
“What gives you such an idea?” Evan Pell asked, with interest.
“It’s a feeling—instinct, maybe. Possibly it’s because I’m trying to find
something, and imagine it all. Maybe I’ve magnified little,
inconsequential things.”
“What has all this to do with Abner Fownes?”
“Why—nothing. He seems to be a rather typical small-town magnate.
He’s egotistical, bumptious, small-minded. He loves importance—
and he’s rich. The professional politicians know him and his
weaknesses and use him. He’s a figurehead—so far as actual things
go, with a lot of petty power which he loves to exercise.... He’s a
bubble, and, oh, how I’d love to prick him!”
Evan bowed to her with ironical deference. “Remarkable,” he said. “A
clean-cut, searching analysis. Doubtless correct. You have been
studying him cursorily for a matter of days, but you comprehend him
to the innermost workings of his mind.... I, a trained observer, have
watched and scrutinized Abner Fownes for a year—and have not yet
reached a conclusion. May I compliment you, Miss Lee?”
Carmel’s eyes snapped. “You may,” she said, and then closed her
lips determinedly.
“You were going to say?” Evan asked, in his most irritating,
pedagogical tone.
“I was going to say that you have mighty little to be supercilious
about. You don’t know any more about this man than I do, and
you’ve been here a year. You don’t like him because he hurt your
vanity, and you’re so crusted over with vanity that whatever is inside
of it is quite lost to sight.... He had you discharged as superintendent
of schools, and it rankles.... It’s childish, like that letter of yours....
Oh, you irritate me.”
“Er—at any rate you have the quality of making yourself clear,” he
said, dryly, not offended, she was surprised to note, but rather
amused and tolerant. He was so cocksure, so wrapped up in himself
and his abilities, so egotistical, that no word of criticism could reach
and wound him. Carmel wanted to wound him, to see him wince.
She was sorry for him because she could perceive the smallness,
the narrowness, the poverty of his life; yet, because she felt,
somehow, that his character was of his own planning and
constructing, and because it was so eminently satisfactory to her,
that it was a duty to goad him into a realization of his deficiencies.
Evan Pell did not seem to her a human being, a man, so much as a
dry-as-dust mechanism—an irritating little pedant lacking in all
moving emotions except boundless vanity.
She had taken him into the office, half from sympathy, half because
somebody was needed and he was the only help available. At times
she regretted it. Now she leaned forward to challenge him.
“You’ve boasted about your abilities as a trained investigator,” she
said. “Very well, then, investigate. That’s the business of a reporter.
Gibeon is your laboratory. You’ll find it somewhat different to get at
facts hidden in human brains than to discover the hidden properties
of a chemical or to classify some rare plant or animal.... I haven’t a
trained mind. I wasn’t an infant prodigy. I haven’t spent my lifetime in
educating my brain out of all usefulness, but I can see there’s
something wrong here. Now, Mr. Pell, take your trained faculties out
and discover what it is. There’s investigation worth while.”
“Are you sure,” said Evan, “you will have the courage to publish what
I find?”
She shrugged her shoulders. “There’s no use talking about that,” she
said, “until you find something.”
“What,” he said, provocatively, “do you want me to investigate first?”
“The one thing that cries out for investigation. Find out why nothing is
done to discover what happened to Sheriff Churchill. Find out why he
disappeared and who made him disappear and what has become of
him. Fetch me the answers to these questions and I’ll take back all
I’ve said—and apologize.”
“Has it—er—occurred to you that perhaps Sheriff Churchill
disappeared because he—investigated too much?”
“Are you afraid?” she asked.
He wrinkled his brows and peered at her through his spectacles, and
then, nonplused her by answering, calmly, “I rather fancy I am. Yes,
now I come to give consideration to my emotions, I find I am
apprehensive.”
“Then,” she said, with a shrug, “we will forget about it.”
“You are trying,” he said, “to make me feel ashamed because I am
afraid. It is useless. I shall not be ashamed. It is natural I should be
afraid. Self-preservation dictates fear. The emotion of fear was
implanted in man and animals as a—er—safety device to prevent
them from incurring dangers. No, I am not in the least ashamed....
Fortunately, reason has been provided as well as fear, and,
consequently, if reason counsels a course of action which fear would
veto, it is only natural that intelligence should govern.... Reason
should always control emotion. Therefore, apprehensive as I am of
unpleasant consequences to myself, I shall proceed with the
investigation as indicated.” His tone was final. There was no
boasting in his statement, only the logical presentation of a fact. He
was afraid, but his reason indicated to him that it was worth his while
to subject himself to the hazards of the situation. Therefore he
subordinated fear.
But Carmel—responsibility sat upon her heavily in that moment. She
had ordered or goaded a human being into risking his person,
perhaps his life. That phase of it had not presented itself to her. She
was sending a man into danger, and the responsibility of her doing
so arose stark before her.
“I—I have no right,” she said, hesitatingly. “I was wrong. I cannot
allow you to put yourself in danger.”
“Unfortunately,” said Evan Pell, “you have no vote in the matter. I
have made the decision.... Of course, you may dispense with my
services, but that will not affect my conduct. I shall find out what
became of Sheriff Churchill and put myself in a position to lay before
the proper authorities substantiated facts covering all phases of his
disappearance.”
“But——”
He raised his hand, palm toward her. “My decision is final,” he said,
with asperity.
 CHAPTER VIII
GIBEON was so accustomed to Abner Fownes that it took him for
granted, as if he were a spell of weather, or the Opera House which
had been erected in 1881, or the river which flowed through the
town, tumultuously in spring and parsimoniously in the heat of
summer when its moisture was most sorely needed. On the whole,
Abner bore more resemblance to the river than to either weather or
Opera House. He was tumultuous when he could do most damage,
and ran in a sort of trickle when such genius as he had might be of
greater service. On the whole, the village was glad it possessed
Abner. He was its show piece, and they compared him with the show
citizens of adjacent centers of population.
Your remote villages are conscious of their outstanding personalities,
and, however much they may dislike them personally and quarrel
with them in the family, they flaunt them in the faces of outsiders and
boast of their eccentricities and take pride in their mannerisms. So
Gibeon fancied it knew Abner Fownes from the meticulous crust in
which his tailor incased him inward to his exact geometrical center; it
was positive it comprehended his every thought and perceived the
motive for his every action. For the most part its attitude was
tolerant. Gibeon fancied it allowed Abner to function, and that it could
put a stop to his functioning whenever it desired. The power of his
money was appraised and appreciated; but it was more than a little
inclined to laugh at his bumptious pretense of arbitrary power.
George Bogardus, furniture dealer and undertaker, embalmed the
public estimate in words and phrases.
“Abner,” said Bogardus, “figgers himself out to be a hell of a feller,
and it does him a sight of good and keeps his appetite hearty—and,
so fur’s I kin see, ’tain’t no detriment to nobody else.”
Gibeon had its moments of irritation when Abner seemed to take too
much for granted or when he drove with too tight a check rein, but
these were ephemeral. On the whole, the town’s attitude was to let
Abner do it, and then to call him a fool for his pains.
He was a native of Gibeon. His father before him had moved to the
town when it was only a four corners in the woods, and had
acquired, little by little, timber and mills, which increased in size from
year to year. Gibeon had grown with the mills and with the coming of
the railroad. Old Man Fownes had been instrumental in elevating it to
the dignity of county seat. He had vanished from the scene of his
activities when Abner was a young man, leaving his son
extraordinarily well off for that day.
Abner, as a youth, had belonged to that short, stout class of men
who are made fun of by the girls. He was never able to increase his
stature, but his girth responded to excellent cookery. No man denied
him the attribute of industry in those early days, and, as Gibeon
judged, it was more by doggedness and stodgy determination that
he was enabled to increase his inherited fortune than it was by the
possession of keen mental faculties.
For ten years Abner was satisfied to devote himself to the
husbanding and increasing of his resources. At the end of that time,
his wife having died, he discovered to Gibeon an ambition to rule
and a predilection for county politics. It was made apparent how he
realized himself a figure in the world, and tried to live up to the best
traditions of such personages as his narrow vision had enabled him
to catch glimpses of. He seemed, of a sudden, to cease taking
satisfaction in his moderate possessions and to desire to become a
man of commanding wealth. He bought himself garments and
caused himself to become impressive. He never allowed himself an
unimpressive moment. Always he was before the public and
conducting himself as he judged the public desired to see a
personage conduct himself. By word and act he asserted himself to
be a personage, and as the years went by the mere force of
reiterated assertion caused Gibeon to accept him at his own
valuation.... He was patient.
The fact that fifty of every hundred male inhabitants were on his
payroll gave him a definite power to start with. He used this power to
its limit. It is true that Gibeon laughed up its sleeve and said that
smarter men than Abner used him as an implement in the political
workshop; but if this were true, Abner seemed unconscious of it.
What he seemed to desire was the appearance rather than the
substance. It seemed to matter little to him who actually made
decisions so long as he was publicly credited with making them. Yet,
with all this, with all Gibeon’s sure knowledge of his inner workings, it
was a little afraid of him because—well, because he might possess
some of the power he claimed.
So, gradually, patiently, year by year, he had reached out farther and
farther for money and for political power until he was credited with
being a millionaire, and had at least the outward seeming of a not
inconsiderable Pooh-Bah in the councils of his party.
The word “fatuous” did not occur in the vocabulary of Gibeon. If it
had seen the word in print it could not have guessed its meaning, but
it owned colloquial equivalents for the adjective, and with these it
summed up Abner. He possessed other attributes of the fatuous
man; he was vindictive where his vanity was touched; he was
stubborn; he followed little quarrels as if they had been blood feuds.
In all the ramifications of his life there was nothing large, nothing
daring, nothing worthy of the comment of an intelligent mind. He was
simply a commonplace, pompous, inflated little man who seemed to
have found exactly what he wanted and to be determined to squeeze
the last drop of the juice of personal satisfaction out of the realization
of his ambitions.
His home was indicative of his personality. It was a square, red-brick
house with an octagonal cupola on its top. It boasted a drive and
evergreens, and on the lawn stood an alert iron buck. The cupola
was painted white and there was a lightning rod which projected
glitteringly from the top of it. You knew the lightning rod was not
intended to function as a protection against electrical storms as soon
as you looked at it. It was not an active lightning rod in any sense. It
was a bumptious lightning rod which flaunted itself and its
ornamental brass ball, and looked upon itself as quite capping the
climax of Abner Fownes’s displayful life. The whole house impressed
one as not being intended as a dwelling, but as a display. It was not
to live in, but to inform passers-by that here was an edifice, erected
at great expense, by a personage. Abner lived there after a fashion,
and derived satisfaction from the house and its cupola, but
particularly from its lightning rod. An elderly woman kept house for
him.
Abner never came out of his house—he emerged from it. The act
was a ceremony, and one could imagine he visualized himself as
issuing forth between rows of bowing servitors, or through a lane of
household troops in wonderful uniforms. Always he drove to his
office in a surrey, occupying the back seat, erect and conscious,
while his unliveried coachman sagged down in the front seat, sitting
on his shoulder blades, and quite destroying the effect of solemn
state. Abner, however, was not particular about lack of state except
in his own person. Perhaps he had arrived at the conclusion that his
own person was so impressive as to render negligible the
appearance of any contiguous externals.
It was his office, however, which, to his mind, perfectly set him off. It
was the setting for the jewel which was himself, and it was a perfect
setting. The office knew it. It oozed self-importance. It realized its
responsibilities in being the daily container for Abner Fownes. It was
an overbearing office, a patronizing office. It was quite the most
bumptious place of business imaginable; and when Abner was in
place behind his flat-topped mahogany desk the room took on an air
of complacency which would be maddening to an irritated proletariat.
It was an impossible office for a lumberman. It might have been the
office of a grand duke. Gibeon poked fun at the office, but boasted to
strangers about it. It had on its walls two pictures in shadow boxes
which were believed to be old masters rifled from some European
gallery. What the pictures thought about themselves is not known,
but they put the best possible face on the matter and pretended they
had not been painted in a studio in the loft of a furniture store in
Boston. Their frames were expensive. The walls were paneled with
some wood of a golden tone which Abner was reputed to have
imported for the purpose from South America. The sole furniture was
that occupied by Abner Fownes—his desk and chair. There was no
resting place for visitors—they remained standing when admitted to
the presence.
If Abner Fownes, for some purpose of his own, with Machiavellian
intelligence, had set out to create for himself a personality which
could be described only by the word fatuous, he could not have done
better. Every detail seemed to have been planned for the purpose of
impressing the world with the fact that he was a man with illusions of
grandeur, motivated by obstinate folly, blind to his silliness; perfectly
contented in the belief that he was a human being who quite
overshadowed his contemporaries. If he had possessed a strong,
determined, rapacious, keen mind, determined upon surreptitious
depredations upon finance and morals, he could not have chosen
better. If he wished to set up a dummy Abner which would assert
itself so loudly and foolishly as to render the real, mole-digging
Abner invisible to the human eye, he could not have wrought more
skillfully. He was a perfect thing; his life was a perfect thing.... Many
men, possessing real, malevolent power, erect up clothes-horses to
function in their names. It was quite unthinkable that such a man
should set himself up as his own stalking horse.
Abner sat before his desk, examining a sheaf of tally sheets. They
were not the tally sheets of his own lumber yard, but figures showing
the amount of spruce and pine and birch and maple piled in
numerous mill yards throughout the state. Abner owned this lumber.
In the fall he had watched the price of lumber decline until he
calculated it had reached a price from which it could only rise. Others
had disagreed with him. Nevertheless, he had bought and bought
and bought, intent upon one coup which should make him indeed the
power in the lumber industry of the country, which was his objective.
He had used all available funds and then had carried his credit into
the market, stretching it until it cried for mercy. Now he owned
enough cut lumber to build a small city—and the price had continued
to drop. That morning’s market prices continued the decline. Abner’s
state of mind was not one to arouse envy.
The sum of money he must lose if he sold at the market represented
something more than the total of his possessions. Gibeon rated him
as a millionaire. That he was in difficulties was a secret which he had